State income tax isn't why those millionaires are fleeing

Jay Hancock

The millionaires are fleeing Maryland, all right. But not because of the measly tax surcharge on income over $1 million.

They're bugging out because of Maryland's estate tax, which applies to a bigger portion of a dead person's hoard than the federal estate tax or those in other states.

Strange to tell, rich refugees didn't want to speak with me. But their lawyers did. They suggest the high inheritance tax costs the state a lot more than it brings in because absconding aristocrats don't pay any Maryland tax, let alone the one when they die.

"For years and years, I have had clients who complained about Maryland taxes and never took any action," says Lowell G. Herman.

But recently, nearly a dozen customers with big stashes set up residence elsewhere, largely because of Maryland's failure to match other states in reducing or eliminating its estate tax, he says. "But that's just sort of the beginning. There are many others who are thinking about it."

Wailing rose from Annapolis last week after this newspaper reported that income tax returns from those making more than $1 million plunged by a third.

Suspicion focused on the millionaire tax, which takes 6.25 percent of every dollar pocketed over that amount. According to one theory, that slightly higher (and temporary) rate, which became effective last year, pushed plutocrats across the border.

The much more likely explanation is that the worst financial crisis in decades culled the ranks of million-dollar filers. But that doesn't mean numerous wealthy Marylanders aren't becoming wealthy Floridians or Virginians.

They are. But their problem is the estate tax, which involves much bigger dollars.

"Nobody's going to leave the state because income tax rates go up a point over a million dollars - or whatever it is. It's just not going to happen," says Stuart Levine, a Baltimore tax lawyer and adjunct professor at the University of Baltimore law school. "But they do have to leave to some degree because of the estate tax."

Maryland has a complicated relationship with rich people. As one of the wealthiest states in the country, it cultivates more than its share. But they don't like to stick around once they've amassed a pile. At least they don't want to be taxed here.

Along with a cameo appearance in baseball records for his 50-home run, 1996 season, former Baltimore Oriole Brady Anderson shows up in Maryland's tax annals.

The state tried to declare him a resident and claimed thousands in back taxes, even though he owned a house in Nevada. A comptroller's hearing officer rejected the claim.

Maybe the most famous Maryland "domicile" case involved a former Internal Revenue Service manager and tax consultant for the state. The guy bought a condo in Miami Beach, kept his house in Pikesville and claimed residency in low-tax Florida.

Maryland tax authorities, his former colleagues, came after him with guns blazing. They investigated his voting records, car registration and phone book listings, declared him a Marylander and billed him $2,246 in back taxes.

"Former tax collectors do not like to pay income taxes any more than other taxpayers," wrote the judge who ruled on his appeal.

They probably like to pay estate taxes even less. Virginia eliminated its estate tax in 2007; Florida, in 2005. Many other states have done the same.

The federal estate tax doesn't kick in on accumulations smaller than $3.5 million. But Maryland taxes as much as 16 percent of estates exceeding $1 million, which when you think about it is not huge for a lifetime of earning and saving. The value of a home alone in Maryland could get you halfway there. It got worse in 2005 after Congress no longer allowed a federal credit for state-paid estate taxes.

For somebody worth $3 million, leaving Maryland would save his or her heirs $182,000. That's well worth the effort and often easy to do. People worried about the estate tax are mainly retirees. Many already own second homes in low-tax states, and it's hardly a sacrifice spending a few extra months a year in Sarasota to avoid filing in Maryland.

OK, you don't feel sorry for the retiree with $3 million. It doesn't matter. She can choose where to live, and driving her from Maryland means she's not buying in local stores, attending the symphony, or paying sales and income tax.

"I've never said this about any other law," said Herman, who agrees it's the estate tax, not the income tax, that's compelling the wealthy to leave. "This is one of the dumbest laws I've ever seen. It's very shortsighted from an economic and sociological standpoint for the state of Maryland."

One problem with that view is that last year, Maryland's estate-tax haul hit a record $195 million. But that could have been an aberration, swelled by the deaths of a few very rich folks, says David Roose, director of the comptroller's Bureau of Revenue Estimates.

We'll know much more in a year or two, after the comptroller's office replaces its neolithic computers. It'll be able to track how many people in which tax brackets are moving in, moving out, living and dying.

If Maryland hasn't cut the estate tax by then, don't be surprised if it shows the millionaire exodus has increased.

The percentage of estates worth more than $1 million taxed by Maryland and the amount saved for someone worth $3 million by leaving Maryland were misstated in an ealier version of this article. The Baltimore Sun regrets the errors.